Environmental, social, and governance (ESG) considerations have moved from the periphery of corporate governance into the heart of fiduciary decision-making. What began as a largely voluntary framework for assessing non-financial risks has become a central point of legal, political, and economic contestation. Yet a fundamental legal question remains unresolved: When fiduciaries incorporate ESG considerations into their decision-making, are they fulfilling their obligations, or exceeding them?
That question lies at the center of some of the most important contemporary debates in corporate law, investment management, and financial regulation. Fiduciaries operate in a legal environment where ESG may be viewed, depending on the jurisdiction, as prudent risk management, as a permissible but optional consideration, or as an impermissible departure from the duty to prioritize financial returns. The legal treatment of ESG therefore turns not on any universal principle, but on the underlying conception of fiduciary purpose embedded in a legal system.
In a new article, I examine how three major jurisdictions, the U.S., EU, and UK, have approached this issue. Although all three have embraced ESG in some form, they have done so through very different legal frameworks, reflecting distinct understandings of corporate purpose, fiduciary obligation, and the role of capital in society.
Three themes emerge. First, the EU has developed the most ambitious and legally integrated ESG framework, increasingly embedding sustainability into fiduciary obligations themselves. Second, the UK has adopted a more cautious middle path, promoting ESG through disclosure and stewardship while retaining a shareholder-centric fiduciary core. Third, the U.S. has become deeply fragmented, with ESG now functioning as both a governance norm and a political fault line. In some states, fiduciaries may be criticized for failing to consider ESG risks. In others, they may face liability for considering them at all.
The Fiduciary Question at the Core of ESG
At its essence, ESG presents a classic fiduciary-law problem. Fiduciary duties require the exercise of discretionary power on behalf of others. But discretion must be exercised in accordance with a legally defined purpose. The central inquiry, therefore, is simple to state but difficult to answer: Whose interests must fiduciaries serve, and what factors may they properly consider in doing so?
Traditional fiduciary law is built around the duties of loyalty, care, and good faith. These duties are highly flexible, but not infinitely so. They are interpreted against the backdrop of the legal system’s conception of the corporation and its purpose. Whether ESG is mandatory, permissible, or prohibited depends on that foundational understanding.
Where the corporation is viewed primarily as an instrument for maximizing shareholder wealth, ESG is generally acceptable only to the extent that it is financially material. It must be linked to risk-adjusted returns, enterprise value, or long-term shareholder welfare. By contrast, where the corporation is viewed as a social institution with responsibilities to a broader range of stakeholders, ESG may be regarded not merely as permissible, but as an integral aspect of fiduciary stewardship (Milton Friedman, 1970; Lynn Stout, The Shareholder Value Myth; Colin Mayer, Prosperity).
This normative divide explains much of the transatlantic variation. The legal status of ESG is, ultimately, a function of competing theories of the firm.
The U.S.: ESG and the Fragmentation of Fiduciary Law
No jurisdiction better illustrates the politicization of ESG than the U.S. The federal framework remains unsettled. While the Securities and Exchange Commission has sought to expand climate and sustainability disclosures, regulatory initiatives have faced legal, political, and administrative resistance. The result is a patchwork of evolving federal guidance rather than a coherent national ESG regime.
The more consequential developments have occurred at the state level.
A number of Democrat-led states, including California, Colorado, Illinois, Maryland, and New Hampshire, have encouraged the integration of ESG considerations into public investment decision-making (see discussion of pro-ESG state initiatives relying on disclosure and transparency mechanisms). Illinois’ Sustainable Investing Act, for example, expressly recognizes that sustainability factors may be financially material and therefore relevant to prudent investment analysis. Maryland has similarly required climate-related risk assessments in the management of public pension assets. These initiatives do not impose a universal duty to prioritize ESG, but they affirm that ESG considerations can fall squarely within the fiduciary mandate when they bear on long-term financial performance (Illinois Sustainable Investing Act, 30 ILCS 238; Maryland Code, State Personnel and Pensions).
By contrast, many Republican-led states have moved in the opposite direction. Florida, Texas, Arkansas, Kentucky, Kansas, Montana, and others (see, e.g., reports of over 165 anti-ESG bills introduced across 37 states in 2023) have enacted legislation or administrative rules restricting the use of ESG criteria in public-fund management. These measures typically require investment decisions to be based solely on pecuniary factors and prohibit the use of non-pecuniary considerations. Some statutes go further, authorizing investigations, blacklists, or contractual exclusions for financial institutions perceived as advancing ESG agendas (Florida HB 3 (2023); Texas SB 13 (2021); Arkansas Act 411 (2023)).
This has fundamentally altered the fiduciary landscape. In certain jurisdictions, failure to consider climate risk may be criticized as imprudent. In others, the consideration of climate risk may itself be characterized as a breach of fiduciary duty if framed as subordinating financial returns to social objectives.
The irony is striking. Efforts to resist perceived politicization in investment decision-making have themselves politicized fiduciary law. Asset managers now confront not a single American approach to ESG, but multiple competing regimes, each grounded in a different theory of fiduciary obligation.
Litigation has not resolved these tensions. In Thole v. U.S. Bank N.A., the United States Supreme Court held that plaintiffs must demonstrate a concrete and particularized injury to establish standing, thereby limiting fiduciary litigation in the ESG context. Similarly, in Wayne Wong et al. v. New York City Employees’ Retirement System et al., claims challenging ESG-driven divestment strategies were dismissed for lack of standing under New York Civil Practice Law and Rules.
Recent climate litigation signals evolving judicial engagement. In Held v. Montana, a state court recognized constitutional environmental rights in the context of fossil fuel policy, holding that statutory limitations violated the right to a clean and healthful. Although such decisions do not directly reshape fiduciary duties, they reflect a broader shift in legal attitudes toward sustainability.
In practical terms, the United States offers no uniform answer. Fiduciaries in anti-ESG states face real liability risks for promoting ESG, while those in pro-ESG jurisdictions operate within permissive frameworks shaped by disclosure norms and judicial deference. This fragmentation reflects both political controversy and the enduring dominance of shareholder primacy.
The EU: ESG as Regulatory Architecture
If the U.S. treats ESG as contested ideology, the EU treats it as a core component of financial regulation.
The EU has built the most sophisticated and comprehensive sustainable-finance framework in the world. This framework includes the Sustainable Finance Disclosure Regulation (SFDR), the Taxonomy Regulation, the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD), and related delegated acts. Together, these measures do more than improve transparency. They seek to reshape the conduct of firms, financial institutions, and fiduciaries (Regulation (EU) 2019/2088; Regulation (EU) 2020/852; Directive (EU) 2022/2464).
Under SFDR, financial market participants must disclose how sustainability risks are integrated into investment decisions and advisory processes. The Taxonomy Regulation establishes a detailed classification system for environmentally sustainable economic activities. CSRD significantly expands the scope and rigor of corporate sustainability reporting, including through mandatory assurance and standardized reporting requirements. The CSDDD extends these obligations further by imposing due-diligence duties with respect to human rights and environmental impacts across value chains.
The cumulative effect is transformative. ESG is no longer merely a matter of voluntary stewardship or reputational strategy. It has become part of the legal infrastructure governing capital allocation.
Importantly, the EU’s approach reflects a broader stakeholder-oriented conception of the corporation. Corporate governance is understood not solely as a mechanism for shareholder wealth maximization, but as a framework for balancing the interests of shareholders, employees, creditors, consumers, communities, and the environment. Sustainability is therefore treated as integral to long-term value creation rather than external to it.
Judicial developments reinforce this trajectory. Cases such as Urgenda Foundation v State of the Netherlands and Milieudefensie v Royal Dutch Shell demonstrate a willingness to translate climate-related norms into enforceable legal obligations. Although these decisions arise outside traditional fiduciary doctrine, they reshape the legal environment in which fiduciaries operate. They increase the likelihood that climate and sustainability risks will be viewed as matters requiring active governance rather than discretionary attention (Urgenda [2019]; Milieudefensie v Shell (District Court of The Hague, 2021)).
In Deutsche Umwelthilfe v. TotalEnergies Wärme & Kraftstoff Deutschland GmbH, the Düsseldorf Regional Court held that TotalEnergies’ claim that its Thermoplus heating oil was “climate neutral,” by reason of carbon offsetting, was misleading, and enjoined its marketing as “CO₂ compensated.” The German Regional Court may well have drawn inspiration from the earlier Dutch decisions, thereby situating its reasoning within an emerging European judicial willingness to integrate ESG, sustainability, and anti-greenwashing norms into diverse legal fields, including environmental law, consumer protection law, and unfair competition law, among others. Taken together, these decisions reflect the progressive integration of sustainability considerations into the broader fabric of European private and public law.
In other words, these decisions indicate a willingness to interpret legal duties in light of broader ESG considerations. Fiduciaries may therefore face liability not only for misrepresenting ESG commitments but also for failing to implement them meaningfully. Although derivative litigation remains less common due to structural constraints, the broader regulatory and judicial environment supports ESG enforcement.
In the EU, therefore, the more significant fiduciary risk increasingly lies not in considering ESG, but in failing to do so adequately.
The UK: Between Shareholder Primacy and Stakeholder Governance
The UK occupies a more complex position. It has embraced many elements of the ESG agenda, particularly through disclosure, stewardship, and anti-greenwashing regulation. Yet its underlying fiduciary framework remains firmly anchored in shareholder primacy.
Section 172 of the Companies Act 2006 requires directors to promote the success of the company for the benefit of its members while paying attention to a range of stakeholders, including employees, suppliers, customers, communities, and the environment. This formulation, commonly described as “enlightened shareholder value,” was intended to broaden the perspective of directors without abandoning shareholder primacy (Companies Act 2006, s 172; Company Law Review Steering Group, Modern Company Law for a Competitive Economy).
In practice, however, section 172 has not fundamentally altered the hierarchy of corporate interests. Shareholders remain the ultimate beneficiaries of directors’ duties. Stakeholder interests may be considered, but only insofar as doing so promotes the long-term success of the company.
The Supreme Court’s decision in BTI 2014 LLC v Sequana SA confirms this structure. The Court reaffirmed that, in a solvent company, directors’ duties are owed to the company as a whole, which ordinarily means the shareholders collectively. Only when insolvency is probable do creditor interests acquire primacy ([2022] UKSC 25).
The recent ClientEarth v Shell litigation further illustrates the limits of judicial intervention in ESG governance. Although the claimant sought to hold Shell’s directors accountable for alleged failures in climate strategy, the High Court refused permission to continue the derivative claim, holding that the claimant had failed to establish a prima facie case ([2023] EWHC 1137 (Ch)). The court emphasized that directors enjoy broad discretion in balancing competing commercial considerations and that courts are ill-suited to second-guess boardroom judgments absent bad faith, improper purpose, or irrationality.
The UK framework supports ESG engagement. It has implemented mandatory climate-related financial disclosures, developed Sustainability Disclosure Requirements, and introduced a robust anti-greenwashing rule through the Financial Conduct Authority. Yet these initiatives operate largely through disclosure and market discipline rather than through a redefinition of fiduciary purpose.
As a result, fiduciaries in the UK face limited liability risk for both promoting and failing to promote ESG, provided they act in good faith. ESG is encouraged through disclosure and market mechanisms rather than enforced through strict legal obligations.
Liability and the Emerging Asymmetry
The most important practical implication of these divergent approaches concerns fiduciary liability.
In anti-ESG American states, fiduciaries may face legal or regulatory exposure for considering ESG factors deemed non-pecuniary. The legal concern is that fiduciaries have subordinated financial returns to political, social, or ideological objectives.
In the UK, ESG integration is generally permissible where directors or trustees reasonably conclude that such considerations are relevant to long-term value or risk management. The same is broadly true in pro-ESG American jurisdictions. Courts remain reluctant to impose liability for either integrating or declining to integrate ESG absent clear evidence of bad faith, procedural failure, or conflict of interest.
The EU, however, is moving toward a different equilibrium. As sustainability obligations become more deeply embedded in positive law, failure to account for material ESG risks may itself constitute a breach of legal duty. This is particularly true in the context of disclosure obligations, due diligence requirements, and anti-greenwashing enforcement.
The result is an emerging asymmetry. In some jurisdictions, ESG creates legal risk when adopted. In others, it creates legal risk when ignored.
What This Means for Fiduciaries
For directors, trustees, and investment managers, ESG cannot be approached as a one-size-fits-all governance framework. It is, instead, a jurisdiction-specific fiduciary issue.
First, fiduciaries must distinguish between mandatory and permissive ESG regimes. In the EU, many sustainability obligations are now mandatory. In the UK, ESG is strongly encouraged but often remains discretionary. In parts of the United States, ESG may be restricted or even prohibited in specific contexts.
Second, fiduciaries must ensure that ESG integration is tied to the legal purpose of the entity and the interests of the relevant beneficiaries. In shareholder-centric systems, this generally requires a demonstrable connection between ESG considerations and long-term financial value.
Third, process remains paramount. Courts are often more concerned with how decisions are made than with the substantive wisdom of the decisions. A well-documented process that identifies material risks, considers relevant information, and articulates a rational basis for action will typically receive substantial judicial deference (see, e.g., Aronson v Lewis, 473 A.2d 805 (Del. 1984); Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821).
Finally, greenwashing risk has become a fiduciary issue in its own right. Once firms make sustainability-related claims, those claims can generate legal obligations under securities law, consumer protection law, and general principles of corporate governance.
Final Reflections
The legal future of ESG will be shaped less by slogans than by fiduciary doctrine. The critical issue is not whether ESG is inherently compatible or incompatible with fiduciary duty. Rather, the answer depends on how each legal system defines the purpose of fiduciary power. The question of whether fiduciaries can incur liability for promoting ESG does not admit a single answer. It depends on the legal and institutional context within which fiduciary duties operate.
In the United States, fiduciaries in anti-ESG states may face liability for promoting ESG, while those in pro-ESG jurisdictions operate within permissive frameworks shaped by the business judgment rule (Thole v. U.S. Bank N.A., 140 S. Ct. 1615 (2020)). In the European Union, ESG is embedded within corporate governance, and liability is more likely to arise from failing to integrate sustainability considerations, or for greenwashing (Milieudefensie v. Royal Dutch Shell(2021); Urgenda Foundation v. State of the Netherlands (2019); Deutsche Umwelthilfe v. TotalEnergies Wärme & Kraftstoff Deutschland GmbH). In the United Kingdom, fiduciary liability remains limited, reflecting judicial deference and the persistence of shareholder primacy (ClientEarth v. Shell Plc [2023] EWHC 1137 (Ch); BTI 2014 LLC v. Sequana SA [2022] UKSC 25).
These differences reveal that ESG is not merely a technical issue of corporate governance. It reflects deeper disagreements about the purpose of the corporation and the role of law in shaping economic behaviour. The result is a fragmented transatlantic landscape in which the legal consequences of ESG integration vary significantly.
The differences, however, have profound consequences. They mean that the legality of ESG is contingent not simply on financial materiality, but on the underlying theory of the corporation that a legal system chooses to endorse.
For directors and fiduciaries, ESG has become a matter of legal strategy as much as corporate policy. Navigating this terrain requires careful attention to jurisdictional differences and an understanding of how evolving legal frameworks define the boundaries of fiduciary duty.
That is the true legal limit of ESG. The boundaries of ESG are, in the end, the boundaries of fiduciary purpose itself.
Asif Salahuddin is a postdoctoral fellow at EW Barker Centre for Law & Business, Faculty of Law, National University of Singapore (NUS). This post is based on his article, “The Legal Limits of ESG in Fiduciary Decision-Making: Transatlantic Perspectives from the US, EU and UK,” forthcoming in the European Business Law Review.